Why was the advanced earned income credit stopped?

Can you get a portion of your EIC as an advanced earned income credit? Instead of waiting until the end of the year you would get some of it on your paycheck.

First you might want to know what the advanced earned income credit was all about.

Until December 31 2010, if you qualified for the earned income credit you were able to get a portion of the EIC as an advanced payment. Instead of waiting until the end of the year you would get some of it as part of your paycheck.

Sounds cool, eh? Not having to wait until the end of the year to get your refund sounds nice.

Surprisingly many people do not feel this way; they want to get a fat refund check at the end of the year rather than get a negligible portion every week. I guess the fact that they're giving the IRS a free loan doesn’t bother them.

Only 140,253 taxpayers took advantage of this receiving payments totalling $78,248,000. It is a small amount considering that almost 25 million people receive over 50 billion dollars from the earned income credit. (this data is from 2008)

Seeing that so few people are taking advantage of this advancement of the credit, the government decided to stop it. A benefit that very few people gain from is easier to take away since less people are compromised by removing it.

Why does the government want to do this now? What does the government gain from stopping to give the advanced earned income credit?

Well, for them having the money for a few extra months is a gain. They appreciate the free loan. This money will be used to help states hire school teachers and fund Medicaid.

Stopping the advance payment also makes things simpler when filing the tax return. The advanced earned income tax credit amount (which is found on box 9 of your W-2) will no longer have to be deducted from your earned income credit. (The 2010 tax return can still have this amount because it goes back to the previous year)

This will also reduce errors that happen when the box 9 amount is missed and the EIC is calculated incorrectly. When this error happened the IRS would not realize it right away and would refund the extra money. Only after about a year later, the IRS would realize the discrepancy and they would ask back for the money plus interest. This is highly inconvenient especially if the money is all used up.

So maybe it is for the best for everybody not only the IRS that the advanced earned income credit is a thing of the past.

Updated December 2, 2010

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